Operations Management and Competitive StrategyIn this week’s readings, you explored articles on how the competitive landscape has changed due to advances in technology and operations management practices.
Describe your key takeaways from two of this week’s articles.
Summarize how these takeaways can benefit your company or organization.***Company is a restaurant***Please be sure to site references and materials from article HBR.ORG
APRIL 2016
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SPOTLIGHT ON HOW PLATFORMS ARE RESHAPING BUSINESS
Pipelines, Platforms,
and the New Rules
of Strategy
Scale now trumps differentiation.
by Marshall W. Van Alstyne, Geoffrey G. Parker,
and Sangeet Paul Choudary
This document is authorized for use only by Ashley Cleckley in Operations Management at Strayer University, 2019.
SPOTLIGHT ON HOW PLATFORMS ARE RESHAPING BUSINESS
SPOTLIGHT
ARTWORK Vin Rathod, Aura (series)
2012–2014, photograph
Pipelines,
Platforms,
and the
New Rules
of Strategy
Scale now trumps differentiation.
BY MARSHALL W. VAN ALSTYNE, GEOFFREY G. PARKER,
AND SANGEET PAUL CHOUDARY
2 Harvard Business Review April 2016
This document is authorized for use only by Ashley Cleckley in Operations Management at Strayer University, 2019.
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Marshall W. Van Alstyne
is a professor and chair of
the information systems
department at Boston
University and a fellow at
the MIT Initiative on the
Digital Economy. Geoffrey
G. Parker is a professor
of management science
at Tulane University
and is a fellow at the
MIT Center for Digital
Business. He will be a
professor of engineering
at Dartmouth College,
effective July 2016.
Sangeet Paul Choudary
is the founder and CEO
of Platform Thinking Labs
and an entrepreneurin-residence at INSEAD.
They are the authors of
Platform Revolution (W.W.
Norton & Company, 2016).
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SPOTLIGHT ON HOW PLATFORMS ARE RESHAPING BUSINESS
B
ack in 2007 the five major mobile-phone
manufacturers—Nokia, Samsung, Motorola,
Sony Ericsson, and LG—collectively
controlled 90% of the industry’s global profits.
That year, Apple’s iPhone burst onto the scene
and began gobbling up market share.
By 2015 the iPhone singlehandedly generated 92%
of global profits, while all but one of the former
incumbents made no profit at all.
How can we explain the iPhone’s rapid domination of its industry? And how can we explain its
competitors’ free fall? Nokia and the others had
classic strategic advantages that should have protected them: strong product differentiation, trusted
brands, leading operating systems, excellent logistics, protective regulation, huge R&D budgets, and
massive scale. For the most part, those firms looked
stable, profitable, and well entrenched.
Certainly the iPhone had an innovative design
and novel capabilities. But in 2007, Apple was a weak,
nonthreatening player surrounded by 800-pound
gorillas. It had less than 4% of market share in desktop
operating systems and none at all in mobile phones.
As we’ll explain, Apple (along with Google’s competing Android system) overran the incumbents by
exploiting the power of platforms and leveraging
the new rules of strategy they give rise to. Platform
businesses bring together producers and consumers in high-value exchanges. Their chief assets are
information and interactions, which together are
also the source of the value they create and their
competitive advantage.
Understanding this, Apple conceived the iPhone
and its operating system as more than a product or
a conduit for services. It imagined them as a way to
connect participants in two-sided markets—app
developers on one side and app users on the other—
generating value for both groups. As the number
of participants on each side grew, that value increased—a phenomenon called “network effects,”
which is central to platform strategy. By January
2015 the company’s App Store offered 1.4 million
apps and had cumulatively generated $25 billion
for developers.
Apple’s success in building a platform business
within a conventional product firm holds critical
4 Harvard Business Review April 2016
lessons for companies across industries. Firms that
fail to create platforms and don’t learn the new rules
of strategy will be unable to compete for long.
Pipeline to Platform
Platforms have existed for years. Malls link consumers and merchants; newspapers connect subscribers and advertisers. What’s changed in this century
is that information technology has profoundly reduced the need to own physical infrastructure and
assets. IT makes building and scaling up platforms
vastly simpler and cheaper, allows nearly frictionless participation that strengthens network effects,
and enhances the ability to capture, analyze, and
exchange huge amounts of data that increase the
platform’s value to all. You don’t need to look far
to see examples of platform businesses, from Uber
to Alibaba to Airbnb, whose spectacular growth
abruptly upended their industries.
Though they come in many varieties, platforms
all have an ecosystem with the same basic structure, comprising four types of players. The owners
of platforms control their intellectual property and
governance. Providers serve as the platforms’ interface with users. Producers create their offerings, and
consumers use those offerings. (See the exhibit “The
Players in a Platform Ecosystem.”)
To understand how the rise of platforms is transforming competition, we need to examine how platforms differ from the conventional “pipeline” businesses that have dominated industry for decades.
Pipeline businesses create value by controlling a
linear series of activities—the classic value-chain
model. Inputs at one end of the chain (say, materials
from suppliers) undergo a series of steps that transform them into an output that’s worth more: the
finished product. Apple’s handset business is essentially a pipeline. But combine it with the App Store,
the marketplace that connects app developers and
iPhone owners, and you’ve got a platform.
COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
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Idea in Brief
THE SEA CHANGE
Platform businesses that
bring together producers
and consumers, as Uber and
Airbnb do, are gobbling up
market share and transforming
competition. Traditional
businesses that fail to create
platforms and to learn the new
rules of strategy will struggle.
THE NEW RULES
With a platform, the critical
asset is the community
and the resources of its
members. The focus of
strategy shifts from controlling
to orchestrating resources,
from optimizing internal
processes to facilitating
external interactions, and from
increasing customer value to
maximizing ecosystem value.
As Apple demonstrates, firms needn’t be only
a pipeline or a platform; they can be both. While
plenty of pure pipeline businesses are still highly
competitive, when platforms enter the same marketplace, the platforms virtually always win. That’s why
pipeline giants such as Walmart, Nike, John Deere,
and GE are all scrambling to incorporate platforms
into their models.
The move from pipeline to platform involves
three key shifts:
1. From resource control to resource orchestration. The resource-based view of competition
holds that firms gain advantage by controlling scarce
and valuable—ideally, inimitable—assets. In a pipeline world, those include tangible assets such as mines
and real estate and intangible assets like intellectual
property. With platforms, the assets that are hard to
copy are the community and the resources its members own and contribute, be they rooms or cars or
ideas and information. In other words, the network
of producers and consumers is the chief asset.
2. From internal optimization to external
interaction. Pipeline firms organize their internal
labor and resources to create value by optimizing
an entire chain of product activities, from materials sourcing to sales and service. Platforms create
value by facilitating interactions between external
producers and consumers. Because of this external
orientation, they often shed even variable costs of
production. The emphasis shifts from dictating processes to persuading participants, and ecosystem
governance becomes an essential skill.
3. From a focus on customer value to a focus
on ecosystem value. Pipelines seek to maximize
the lifetime value of individual customers of products and services, who, in effect, sit at the end of a
linear process. By contrast, platforms seek to maximize the total value of an expanding ecosystem
in a circular, iterative, feedback-driven process.
THE UPSHOT
In this new world, competition
can emerge from seemingly
unrelated industries or from
within the platform itself.
Firms must make smart
choices about whom to let
onto platforms and what
they’re allowed to do there,
and must track new metrics
designed to monitor and
boost platform interactions.
Sometimes that requires subsidizing one type of
consumer in order to attract another type.
These three shifts make clear that competition is
more complicated and dynamic in a platform world.
The competitive forces described by Michael Porter
(the threat of new entrants and substitute products
or services, the bargaining power of customers and
suppliers, and the intensity of competitive rivalry)
still apply. But on platforms these forces behave differently, and new factors come into play. To manage
them, executives must pay close attention to the interactions on the platform, participants’ access, and
new performance metrics.
We’ll examine each of these in turn. But first let’s
look more closely at network effects—the driving
force behind every successful platform.
The Power of Network Effects
The engine of the industrial economy was, and remains, supply-side economies of scale. Massive
fixed costs and low marginal costs mean that firms
achieving higher sales volume than their competitors have a lower average cost of doing business.
That allows them to reduce prices, which increases
When a platform
enters the market
of a pure pipeline
business, the
platform virtually
always wins.
April 2016 Harvard Business Review 5
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SPOTLIGHT ON HOW PLATFORMS ARE RESHAPING BUSINESS
volume further, which permits more price cuts—
a virtuous feedback loop that produces monopolies.
Supply economics gave us Carnegie Steel, Edison
Electric (which became GE), Rockefeller’s Standard
Oil, and many other industrial era giants.
In supply-side economies, firms achieve market
power by controlling resources, ruthlessly increasing efficiency, and fending off challenges from any
of the five forces. The goal of strategy in this world is
to build a moat around the business that protects it
from competition and channels competition toward
other firms.
The driving force behind the internet economy,
conversely, is demand-side economies of scale, also
known as network effects. These are enhanced
by technologies that create efficiencies in social
networking, demand aggregation, app development, and other phenomena that help networks
expand. In the internet economy, firms that achieve
higher “volume” than competitors (that is, attract
more platform participants) offer a higher average
value per transaction. That’s because the larger the
network, the better the matches between supply
and demand and the richer the data that can be
used to find matches. Greater scale generates more
value, which attracts more participants, which creates more value—another virtuous feedback loop
that produces monopolies. Network effects gave
us Alibaba, which accounts for over 75% of Chinese
e‑commerce transactions; Google, which accounts
for 82% of mobile operating systems and 94% of
mobile search; and Facebook, the world’s dominant
social platform.
The five forces model doesn’t factor in network
effects and the value they create. It regards external
forces as “depletive,” or extracting value from a firm,
and so argues for building barriers against them. In
demand-side economies, however, external forces
can be “accretive”—adding value to the platform
business. Thus the power of suppliers and customers, which is threatening in a supply-side world, may
be viewed as an asset on platforms. Understanding
when external forces may either add or extract value
in an ecosystem is central to platform strategy.
THE PLAYERS IN A PLATFORM ECOSYSTEM
How Platforms Change Strategy
A platform provides the infrastructure and rules for a marketplace
that brings together producers and consumers. The players in the
ecosystem fill four main roles but may shift rapidly from one role to
another. Understanding the relationships both within and outside
the ecosystem is central to platform strategy.
CREATORS OF THE
PLATFORM’S OFFERINGS
BUYERS OR USERS
OF THE OFFERINGS
(FOR EXAMPLE, APPS ON ANDROID)
PRODUCERS
CONSUMERS
VALUE AND DATA EXCHANGE
AND FEEDBACK
INTERFACES FOR
THE PLATFORM
PROVIDERS
(MOBILE DEVICES ARE
PROVIDERS ON ANDROID)
OWNER
CONTROLLER OF
PLATFORM IP AND
ARBITER OF WHO
MAY PARTICIPATE
AND IN WHAT WAYS
(GOOGLE OWNS ANDROID)
PLATFORM
6 Harvard Business Review April 2016
In pipeline businesses, the five forces are relatively
defined and stable. If you’re a cement manufacturer
or an airline, your customers and competitive set
are fairly well understood, and the boundaries separating your suppliers, customers, and competitors
are reasonably clear. In platform businesses, those
boundaries can shift rapidly, as we’ll discuss.
Forces within the ecosystem. Platform participants—consumers, producers, and providers—
typically create value for a business. But they may
defect if they believe their needs can be met better
elsewhere. More worrisome, they may turn on the
platform and compete directly with it. Zynga began
as a games producer on Facebook but then sought
to migrate players onto its own platform. Amazon
and Samsung, providers of devices for the Android
platform, tried to create their own versions of the
operating system and take consumers with them.
The new roles that players assume can be either
accretive or depletive. For example, consumers
and producers can swap roles in ways that generate value for the platform. Users can ride with Uber
today and drive for it tomorrow; travelers can stay
with Airbnb one night and serve as hosts for other
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Networks Invert the Firm
Pipeline firms have long outsourced aspects of their internal functions, such as customer service. But
today companies are taking that shift even further, moving toward orchestrating external networks that
can complement or entirely replace the activities of once-internal functions.
Inversion extends outsourcing: Where
firms might once have furnished design
specifications to a known supplier, they
now tap ideas they haven’t yet imagined
from third parties they don’t even
know. Firms are being turned inside
out as value-creating activities move
beyond their direct control and their
organizational boundaries.
Marketing is no longer just about
creating internally managed outbound
messages. It now extends to the creation
and propagation of messages by
consumers themselves. Travel destination
marketers invite consumers to submit
videos of their trips and promote them
on social media. The online eyeglasses
retailer Warby Parker encourages
consumers to post online photos of
themselves modeling different styles
and ask friends to help them choose.
Consumers get more-flattering glasses,
and Warby Parker gets viral exposure.
Information technology, historically
focused on managing internal enterprise
systems, increasingly supports external
social and community networks.
Threadless, a producer of T-shirts,
coordinates communication not just
to and from but among customers,
who collaborate to develop the best
product designs.
Human resources functions at
companies increasingly leverage the
wisdom of networks to augment internal
talent. Enterprise software giant SAP has
opened the internal system on which
its developers exchange problems and
solutions to its external ecosystem—to
developers at both its own partners and
its partners’ clients. Information sharing
across this network has improved
product development and productivity
and reduced support costs.
Finance, which historically has
recorded its activities on private
internal accounts, now records some
transactions externally on public, or
“distributed,” ledgers. Organizations
such as IBM, Intel, and JPMorgan are
customers the next. In contrast, providers on a platform may become depletive, especially if they decide
to compete with the owner. Netflix, a provider on
the platforms of telecommunication firms, has control of consumers’ interactions with the content it offers, so it can extract value from the platform owners
while continuing to rely on their infrastructure.
As a consequence, platform firms must constantly encourage accretive activity within their ecosystems while monitoring participants’ activity that
may prove depletive. This is a delicate governance
challenge that we’ll discuss further.
Forces exerted by ecosystems. Managers of
pipeline businesses can fail to anticipate platform
competition from seemingly unrelated industries.
Yet successful platform businesses tend to move
aggressively into new terrain and into what were
once considered separate industries with little warning. Google has moved from web search into mapping, mobile operating systems, home automation,
driverless cars, and voice recognition. As a result of
adopting blockchain technology that
allows ledgers to be securely shared
and vetted by anyone with permission.
Participants can inspect everything
from aggregated accounts to individual
transactions. This allows firms to, for
example, crowdsource compliance
with accounting principles or seek
input on their financial management
from a broad network outside the
company. Opening the books this way
taps the wisdom of crowds and signals
trustworthiness.
Operations and logistics traditionally
emphasize the management of just-intime inventory. More and more often,
that function is being supplanted by
the management of “not-even-mine”
inventory—whether rooms, apps, or
other assets owned by network
participants. Indeed, if Marriott, Yellow
Cab, and NBC had added platforms to
their pipeline value chains, then Airbnb,
Uber, and YouTube might never have
come into being.
such shape-shifting, a platform can abruptly transform an incumbent’s set of competitors. Swatch
knows how to compete with Timex on watches but
now must also compete with Apple. Siemens knows
how to compete with Honeywell in thermostats but
now is being challenged by Google’s Nest.
Competitive threats tend to follow one of three
patterns. First, they may come from an established
platform with superior network effects that uses its
relationships with customers to enter your industry.
Products have features; platforms have communities, and those communities can be leveraged. Given
Google’s relationship with consumers, the value its
network provides them, and its interest in the internet of things, Siemens might have predicted the
tech giant’s entry into the home-automation market
(though not necessarily into thermostats). Second,
a competitor may target an overlapping customer
base with a distinctive new offering that leverages
network effects. Airbnb’s and Uber’s challenges to
the hotel and taxi industries fall into this category.
April 2016 Harvard Business Review 7
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SPOTLIGHT ON HOW PLATFORMS ARE RESHAPING BUSINESS
The final pattern, in which platforms that collect
the same type of data that your firm does suddenl…
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